Money Month - Part 3

Here at PaySauce, we’re lucky to have some pretty cool mates at Crayon who really know their stuff about budgeting.

So if you’re interested in taking control of your finances, learning how to budget, and what other resources are available for you to use, read on. And don’t worry; it’s not as daunting as it might first sound!

How to get started with budgeting

Before we get into the different approaches to budgeting, there are three worthwhile steps to do first so you set yourself up for success.

1. Find your why
2. Know where your money is currently going
3. Identify what spending brings value to your life - and what doesn’t

Step 1: Find your why

Like any behaviour change, you’re much more likely to stick with it if you know why you’re doing it. For example, your why might be, “I want someone who can provide my family with financial security and that means being more intentional with my money.”

"Every action you take is a vote for the type of person you wish to become. No single instance will transform your beliefs, but as the votes build up, so does the evidence of your new identity.”

- James Clear, Author of Atomic Habits

Step 2: Know where your money is currently going

From avoiding medical tests to leaving those bank statements unopened, we often tune out at the very time we need to pay attention. There’s even a name for this — the Ostrich Effect.

Understanding where your money is going is a key step to taking control of your finances. If the thought of this makes you feel uncomfortable, you’re not alone. Research from a major global bank found that 37% of millennials have a financial ‘Fear of Finding Out’ (FOFO). We often know that money could have been better spent or not spent at all, but in this case, ignorance is not bliss - and only makes you more anxious.

So, download the last 6 months of bank statements and see where your money is going. There are heaps of budgeting apps available to make this process easier. Sorted, from Te Ara Ahunga Ora Retirement Commission, also has heaps of free tools to help manage your finances, including a budget planner, mortgage, savings, Kiwisaver and debt calculators, investment profilers, and blogs.

Step 3: Identify what spending brings value to your life - and what doesn’t

What do you consider money well spent? What doesn’t bring value to your life? One way to do this is through a money diary where you record what you bought and how it made you feel. You’ll get a sense of what’s high/low value within a week or two.

Types of budgeting

When it comes to budgeting techniques, there’s no one-size-fits-all. We run through the five most common types.

Zero-based budgeting

"Give every dollar a job”

How it works: it gets its name from the idea that income less expenses (which includes savings and investments) equals zero.

You decide in advance where every dollar goes so that your income matches exactly what goes out of your account. If you overspend in one category, you’ll need to take cash from another category to compensate.

Best suited if:

• You want complete control over your money, and you're willing to put in the time to dig into the details behind each category
• You can predict your income and expenses with reasonable accuracy
• You typically wouldn’t spend money unless it’s planned for

Generally, this is a better option for someone used to budgeting or has a health emergency account because there’s less room for error. A single large expense could throw you out.

Envelope budgeting

"A cash-only budget”

How it works: Allocate your money to your separate categories. Withdraw cash and put the cash into envelopes labelled to match your categories. Once the cash is gone, you can’t get more until the next budgeting period.

Best suited if:

• You want control over your budgeted categories and how much cash is allotted to each category
• If you struggle with overspending, this can reign it in. While there are apps available that can implement this digitally, keep in mind our brains are wired so that something physical in front of us is more powerful in driving (or limiting) behaviour than a number on a screen.

50/30/20 budget

“The balanced budget”

How it works: you break down your take-home pay into three categories:

Needs (50%):	Housing, groceries, utilities, insurance transportation, etc.
Wants (30%):	Travel, entertainment, dining out, shopping, hobbies, etc.
Savings (20%):	Debt repayments, savings and investing

Best suited if:

• You don't want to track all your expenses meticulously
• You can easily keep track of each overall category in real time, so you don't overspend
• You're clear about what counts as a want versus a need
• 20% towards saving and debt is sufficient to meet your obligations and goals

80/20 budget

"Pay yourself first”

How it works: you skim your savings off the top (20%) and then freely spend the rest (80%). It’s essentially a “reverse” budget that puts savings before immediate expenses.

Best suited if:

• You don't want to crunch every number or do much budget maintenance
• You struggle with saving each month

"No budget" budget*

* technically not a budget since there's no plan!

How it works: You only have to pay attention to one number, e.g., you don’t allow your checking account balance to go below a set number. You can spend as you see fit on everything else without overdrawing your account.

Best suited if:

• You check your account balance often, but you have no interest in tracking your expenses
• You know when recurring bills and income hit your account so you can ensure there is enough to meet your bills
• You’re a disciplined spender

Four tips to help budgeting stick:

#1: Budget on a weekly level rather than monthly

This counteracts the “windfall effect” (many of us feel more flush on the days we get paid — and thus end up spending more — compared to the last day of our pay cycle.)

#2: Automate, automate, automate

Automate your income, bills, and savings to stay on top of your finances amidst the chaos of life. This avoids late fees and interest and saves you time.

#3: Build a short-term emergency fund

Don't let unexpected expenses throw you off track. A buffer will help you manage those one-off costs (like that punctured tire!) and give you more peace of mind.

#4: Get an accountability buddy

We’re more likely to follow through with something if we have someone in our life who will (gently) check in on us. This could be a partner, sibling, parent, or friend.

We’re not through just yet…

So far this Money Month, we’ve covered ways you can manage debt, and now, ways you can take control of your money and keep on top of your finances. You might wonder, how can I make my money work for me in the future? How can I squirrel it away for a rainy day and let it grow without touching it?

Never fear! We’ll serve up some tips to help you achieve your goals. If you’re keen to learn more, keep an eye out for our upcoming blog.

This content is brought to you by our friends at Crayon. You can find more helpful resources on their website: https://www.gocrayon.com

The information provided is general and not regulated financial advice for the purposes of the Financial Markets Conduct Act 2013. Please seek independent legal, financial, tax, or other advice in considering whether the content in this article is appropriate for your goals, situation or needs. The information in this article is current as of 9 August 2024.